2022 (9) TMI 887 - HC - Income Tax

TP Adjustment - adjustment on account of ALP determined for royalty payment and on account of managerial remuneration to the director - Advertisement, Marketing and Promotion ( AMP ) expenses incurred by the assessee for the benefit of the AE s trademark and brand - rejection of two comparables, namely, Columbia Laboratories Inc. and Premier Consumer Products Inc. - HELD THAT - Both fact finding authorities have concurrently held that the rejection of the two comparables by the TPO is based on conjectures and surmises and thus, deleted the addition made on account of transfer pricing adjustment for transaction related to royalty. Appellant concedes that if the rejected two comparables are taken into consideration, the payment made by the assessee to its AEs towards royalty would be at arm s length and no adjustment would be merited. He also concedes that the said two comparables comply with all the filters prescribed by the TPO. We therefore find that the reliance placed by CIT(A) and ITAT on the judgment of this Court in Chrys Capital Investment 2015 (4) TMI 949 - DELHI HIGH COURT was correct - an enquiry under Rule 10B(3) ought to be carried out, to determine as to whether the material differences between the assessee and the said entity can be eliminated. Unless such differences cannot be eliminated, the entity should be included as a comparable. No substantial questions of law arise for consideration.

Summary

Issues:
1. Challenge to ITAT order on transfer pricing adjustment for royalty payment.
2. Rejection of comparables by TPO for transfer pricing adjustment.

Analysis:

Issue 1: Challenge to ITAT order on transfer pricing adjustment for royalty payment
The appellant challenged the ITAT order confirming the CIT(A) decision to delete the adjustment made on account of transfer pricing for royalty payment. The appellant argued that the royalty payment was excessive and not at arm's length due to the AMP expenses incurred for the benefit of the AEs. The appellant contended that the TPO's basis for the adjustment was flawed as it relied on huge commission expenditure creating marketing intangibles for AEs. The appellant also criticized the reliance on a previous court judgment, stating it was wrongly applied. However, both the CIT(A) and ITAT upheld the deletion of the adjustment, emphasizing that the rejection of comparables by the TPO lacked cogent reasons and was based on conjectures. The ITAT concurred with the CIT(A) that the rejection of comparables was not justified, leading to the deletion of the adjustment.

Issue 2: Rejection of comparables by TPO for transfer pricing adjustment
The CIT(A) and ITAT found that the TPO's rejection of two comparables, Columbia Laboratories Inc. and Premier Consumer Products Inc., lacked proper reasoning and was based on conjectures. They emphasized that a comparable should not be excluded solely based on a high rate of royalty without considering other material facts like the nature of the entity, business model, terms of agreement, and geographical area. The CIT(A) directed the deletion of the addition made on account of transfer pricing adjustment for royalty related transactions. The ITAT concurred with this decision, stating that the TPO's filters did not indicate that high rates of royalty were a valid criterion for rejection. Both authorities relied on a court judgment to support their decision, emphasizing the need for proper analysis before excluding comparables.

In conclusion, the court dismissed the appeal, stating that no substantial questions of law arose for consideration. The judgment highlighted the importance of proper reasoning and analysis in transfer pricing adjustments, emphasizing that comparables should not be rejected arbitrarily based on high rates without considering relevant factors.